After enjoying a sales surge during the early stages of the pandemic, the U.S. cannabis industry showed signs of slowing down in the face of economic challenges, including declining demand. Last year most cannabis stocks lost at least two-thirds of their value, as a lack of movement on federal prohibition, along with weakness in equity markets, weighed on the sector.
The Canadian cannabis market is facing a supply glut that is driving down wholesale and retail prices. Citing industrywide overproduction, Zach George, the CEO of cannabis producer SNDL Inc. (SNDL), said, “Oversupply and excess capacity have resulted in high-quality flower being widely available and sold well below the marginal cost of production.”
According to Politico, more than 20 of the largest publicly-traded cannabis companies lost about $550 million on revenues of nearly $4.50 billion in the first half of 2022. Furthermore, owing to the negative consequences of marijuana on public health, including emphysema in smokers and learning delays in adolescents, policymakers are stalling the legalization of cannabis.
Amid the industry’s gloomy prospects, marijuana stocks with weak fundamentals, Tilray Brands, Inc. (TLRY) and Canopy Growth Corporation (CGC), might be best avoided now.
Tilray Brands, Inc. (TLRY)
Headquartered in Leamington, Canada, TLRY operates globally as a cannabis-lifestyle and consumer packaged goods company. It operates through four segments Cannabis Business; Distribution Business; Beverage Alcohol Business; and Wellness Business.
The stock’s forward EV/EBITDA is trading at 31.42x, 133.6% higher than the industry average of 13.45x.
Its trailing 12-month gross profit margin of 20.59% is 62.9% lower than the 55.55% industry average. Its 2.95% trailing-12-month CAPEX/Sales is 36.1% lower than the 4.61% industry average.
For the second quarter of the fiscal year 2023, which ended November 30, TLRY’s net revenue decreased 7.1% year-over-year to $144.14 million. During the same period, the company’s total operating expenses increased 4.1% year-over-year to $91.92 million. Furthermore, the company’s adjusted net loss and loss per share came in at $35.31 million and $0.06, respectively.
Street expects TLRY’s EPS for the fiscal years 2022 and 2023 to remain negative. Its revenue for the third quarter ending February 2023 is expected to decline marginally year-over-year to $151.69 million. Over the past year, the stock has lost 57.6% to close the last trading day at $3.05.
TLRY’s POWR Ratings reflect this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It also has an F grade for Value, Momentum, and Sentiment and a D for Stability. In the D-rated Medical – Pharmaceuticals industry, it is ranked #173 of 174 stocks. Click here to see the additional POWR Ratings for TLRY (Growth and Quality).
Canopy Growth Corporation (CGC)
CGC, headquartered in Smith Falls, Canada, produces, distributes, and sells cannabis and hemp-based products for recreational and medical purposes. The company primarily operates in Canada, the United States, and Germany through two segments: Global Cannabis and Other Consumer Products.
On January 3, CGC announced that it had closed its previously announced transactions with OEG Retail Cannabis and 420 Investments Ltd. to divest its retail business across Canada, which includes the stores operating under the Tweed and Tokyo Smoke retail banners. This might impact the company’s operating revenues.
In terms of forward EV/Sales, CGC is trading at 4.91x, 22.6% higher than the industry average of 4.01x.
Its trailing-12-month asset turnover ratio of 0.09x is 72% lower than the 0.34x industry average, and its 1.42% trailing-12-month CAPEX/Sales is 69.3% lower than the 4.61% industry average.
For the fiscal 2023 third quarter that ended December 31, 2022, CGC’s net revenue decreased 28.2% year-over-year to CAD101.21 million ($75.46 million). Its net loss came in at CAD266.72 million ($198.86 million), widening 130.9% from the prior-year quarter, and its loss per share widened 92.9% year-over-year to $0.54.
Street expects CGC’s revenue for the fourth quarter ending on March 31, 2023, to decrease 11.9% year-over-year to $77.42 million. Its EPS is expected to remain negative for the fiscal years 2023 and 2024. It failed to surpass the consensus EPS estimates in each of the trailing four quarters.
Shares of CGC have declined 60.9% over the past year to close the last trading session at $2.44.
CGC’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
It also has an F grade for Momentum, Stability, and Sentiment and a D for Value. Within the same industry, CGC is ranked #168. To see additional POWR Ratings of CGC for Growth and Quality, click here.
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TLRY shares were trading at $2.99 per share on Friday afternoon, down $0.06 (-1.97%). Year-to-date, TLRY has gained 11.15%, versus a 6.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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